April 2, 2017

Ever wonder why prices in cities such as Toronto keep going up? The reasons given are many – foreign buyers, low interest rates, lack of supply, and so on – but while these are all contributing factors, the real reason is much simpler.

It’s because there is more money.

The solid line shows the Teranet 6-city index which goes back to 1999, the dashed line is a broad measure of money supply (M2++).

And why is there more money? It’s because house prices have gone up. Most of the money in our economy is generated by bank loans, usually against real estate – and when prices go up, they can make larger loans.

Thus house prices and money supply increase in tandem. Of course, at some point they can also go down in tandem …

April 30, 2015

The Globe and Mail recently came out with an article comparing different studies of Canada’s housing market. What was striking was how different the results are. According to Deutsche Bank, houses are 60 percent too expensive, while according to economist Will Dunning they are actually undervalued by 9 percent. Here are all seven estimates:

Deutsche Bank: +60 percent

Fitch (rating agency): +24 percent

Bank of Canada: +20 percent

IMF: +11 percent

TD Bank: +11 percent

CMHC: +3 percent

Dunning: -9 percent

How can they be so different? One reason is that they used different valuation metrics. But a more simple explanation is that the answers depend on the particular stance of the forecaster, and the message they are trying to give.

Fitch (at +24 percent) is sending a warning.

The Bank of Canada (+20) is sending a warning but trying not to be alarmist.

The IMF (+11) is playing it safe.

TD Bank (+11) is also trying to play it safe, since it is exposed to the housing market but mostly protected against declines by government insurance programs.

CMHC (+3) has a lot to lose since they are on the hook for insurance. Safe bet that they will never predict a decline.

Will Dunning (-9) works as chief economist for the Canadian Association of Accredited Mortgage Professionals.